Company valuation

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The company valuation is the determination of the value of whole companies or shares in companies subject. It is an essential part of corporate finance . The economic sub-discipline that deals with the valuation of companies is called valuation theory . The person or group of people in whose interest an evaluation is carried out is called the evaluation subject , the object to be evaluated is called the evaluation object .

Valuation theory

It can be asked what specific purpose a company valuation should fulfill and what conclusions can be drawn from it with regard to the valuation method to be used. To this end, the teaching of company valuation can look back on a long and controversial development process.

Objective evaluation theory

In the 1950s, it was believed that company valuation should aim to determine so-called objective values . The objective valuation theory tries to determine a single value inherent in the company, which is a variable that is valid for everyone. It follows that all subjective aspects are disregarded in the valuation. In particular, it is not taken into account that two prospective buyers could come to different corporate values ​​due to different exploitation options in connection with the company to be bought. As a logical consequence of this thinking, v. a. the so-called net asset value method is used. These views are largely out of date.

Subjective evaluation theory

As a reaction to the criticism of the above-mentioned procedure, which was often viewed as too rigid, the subjective evaluation theory established itself in the 1960s . From now on, evaluations should always be subject-related . It was recognized that the company has its own value for each evaluation subject. It was explicitly taken into account in the evaluation process that two different evaluation subjects can come to a different company value due to a different attitude with regard to future expectations, risk and time as well as a different equipment with alternative investments and strategy alternatives. As a result, the discounted earnings method was used for the valuation .

Functional evaluation theory

As a result of the constant and controversial arguments of the representatives of objective and subjective valuation theory about the “true concept of values”, the so-called functional valuation theory developed in the 1970s. It is also known as the Cologne Functional Doctrine or the Cologne School of Company Valuation, as it was designed at the University of Cologne , mainly by Hans Münstermann , Günter Sieben , Busse von Colbe and Manfred Jürgen Matschke .

The main advantage of this value concept is that it combines elements and views of the other two valuation principles. This always takes place under the aspect of subject-relatedness. According to the functional evaluation theory, there is always a specific evaluation purpose, as a result of which the evaluator must ask about the respective evaluation function that he takes on. Then the question to be answered is which evaluation concept is used to determine the company's value. Since the occasion thus has a significant influence on the choice of the evaluation method, the result always relates to the purpose of the evaluation and must not be assumed to be generally valid. In principle, so-called main and secondary functions can be distinguished here.

Main functions

Reviewer function

Determination of the objectified company value. This term was coined by the IDW for company valuations that are independent of the individual values ​​of the parties.

Decision-making function

The decision value is determined in order to know the limits of one's willingness to concession in the run-up to negotiations or disputes . The point is to determine the subjective marginal price from the point of view of a valuation subject (e.g. the seller of a company). This limit value is related to the decision-making field and the preferences of the evaluation subject. Decision values ​​mark the lower or upper price limit for the parties involved. Even an arbitration value ordered by an expert or a judge is only accepted if it does not violate the decision value and therefore the limit of one's own willingness to concession. However, in dominated conflict situations , the valuation subject has to accept the violation of his decision-making value and thus a deterioration compared to his starting position.

The following features are attached to the decision value:

  • critical size (limit value)
  • Conflict-relatedness (e.g. purchase / sale, merger / split)
  • Dependency on the target system of the evaluation subject
  • Dependence on the decision-making field of the evaluation subject
Mediation and arbitration expert function

The evaluator always acts as an intermediary when two evaluation subjects (e.g. buyer and seller) cannot agree. So there is a conflict situation. A so-called arbitrium value (= arbitration value , agreement value) must then be determined. However, this can only be in the overlap area of ​​the decision values ​​if it is to be perceived as acceptable by all sides.

The discounted earnings method is also used here as an evaluation concept. It's about the determination of an earnings value between two different earnings values.

Reasoning function

Here the evaluator has the task of giving the evaluation subject a value with which he can start the negotiations. The price for a company will regularly deviate from the initial ideas of those involved and result from a negotiation process. It is important to determine a value that is appropriate and expedient from the point of view of the respective valuation subject.

Both the earnings value and the intrinsic value come into question here as a concept of value.

In contrast to the three functions mentioned above, the argumentation function is not seen as a function of the auditor or is fulfilled by the auditor. (IDW S1)

Secondary functions

Information function

The point here is to obtain information about the respective evaluation object through the evaluation . This can be done on a variety of occasions. Such as the credit check.

Tax assessment function

The focus here is on the determination of tax assessment bases for inheritance and gift tax purposes. Since January 1, 2009, the tax legislator has regulated the so-called " simplified income value method " in §§ 199 ff Prescribes the procedure from January 1, 2009 for sole proprietorships, partnerships and freelancers; if the simplified capitalized earnings method leads to an inadequate value, the taxpayer must have his company valued by a business valuation report, the freelancer by a practical valuation report.

Market-oriented valuation theory

Since the 1990s, so - called market - oriented assessment procedures have increasingly been used. The consideration here is that an evaluation situation is not only characterized by the parties involved. Rather, the true determination of value should be achieved by including a large number of evaluation objects and subjects in the evaluation process. This is done using the capital market theoretical foundation of the valuation method. For this purpose, knowledge of portfolio and capital market theory as well as research knowledge in the field of finance theory are explicitly integrated. Ultimately, it is a matter of determining a company value that has been confirmed by all participants in the capital markets.

Discounted cash flow methods are primarily used as the valuation method.

Criticism of the capital market-oriented valuation theory

The central point of criticism of the market-oriented valuation theory is anchored in its capital market theoretical foundation. The CAPM model is used here for the economically justified determination of a risk-adequate discount or capitalization interest rate for the discounted cash flow method . However, its approach to calculating a return expectation that is as risk-based as possible contains serious methodological errors. These are as follows:

  1. The neoclassical conception of a perfect capital market is obviously an unrealistic assumption. The market participants are assumed to have homogeneous expectations, which can be refuted on the basis of existing information asymmetries in the real markets. The assumption of a risk-free interest rate is also not steadfast, since the government bonds of the OECD countries used as reference in reality cannot always be classified as quasi-safe.
  2. Another central problem is the determination of the return components, especially the beta factor . In principle, the capitalization interest rate consists of a risk-free interest rate and a premium for assuming the risk. This risk premium contains the said beta factor, which is intended to reflect the existing systematic risk of the market and is determined from the analysis of historical share price fluctuations. However, there is little evidence that such an asset pricing model can be used to draw conclusions about the future earnings risks of a company. Consequently, it ignores the fact that the valuation of a company should be based on data about the valuation object itself rather than on data about its stock. A large number of current empirical studies support this statement and show the insufficient informative value of the beta factor for the forecast of stock returns. An empirical study (July 1983 to December 2011) for the German stock market showed that companies with lower fundamental risks achieved an above-average return on the stock market. This finding, also known as the volatility anomaly , is in complete contradiction to the statement made by the beta factor, in which a higher risk also leads to a higher expected return. Instead of the actually existing risk situation, the opinion of the capital market with regard to the risks of the company is reflected.

Alternative assessment approaches and factor models

In principle, there are other approaches in addition to the classic CAPM model for a capital market-oriented valuation of companies. At this point, for example, the arbitrage price theory (APT) or the consumption-based capital asset pricing model (CCAPM) should be mentioned. In addition, numerous alternative capital market models have developed in the past that have (at least to a limited extent) improved forecasting capabilities. What all these approaches have in common is that they make the expected return on a share dependent on several sources of risk and are consequently less restrictive than the CAPM model. Which includes:

  • Models of the Q theory
  • Fama-French three-factor model - inclusion of the price-to-book value ratio and the size of the company (market value)
  • Carhart's four-factor model - expansion of Fama and French's approach to include the momentum effect
  • Five-factor model by Fama and French - As the current standard, this version of the model also includes the factors profitability and investment.

Nevertheless, the models mentioned are not entirely consistent, as they too are not compatible with a perfect market due to a large number of capital market anomalies . In this regard, however, alternative approaches have developed in the past that withstand the anomalies. Mention should be made at this point of the “imperfect replication” method, which in principle manages without capital market data for the associated valuation object, as well as the risk coverage approach, which takes into account the capital market imperfections as well as risk discounts.

It is noticeable that company-specific parameters (e.g. growth or insolvency risk) are increasingly being used in the latest models for forecasting equity returns and that capital market data (such as the beta factor) tend to take a back seat.

The so-called investment theory approaches, which are increasingly emerging as suitable evaluation methods, should also be emphasized. What they have in common is that various investment options are weighed against each other and an investment program is determined by means of linear optimization. The rather time-consuming and complex analysis of the alternative investments is problematic. Examples for this are:

  • State marginal price model (ZGPM) / state marginal quota model
  • Approximatively decomposed valuation

The use of so-called semi-investment theoretical valuation methods is also an improved approach, in which the value of a company is determined based on the earnings risks (e.g. standard deviation of profit) instead of using capital market data as a basis, as was previously the case. As a result, the “traditional” capitalized earnings and discounting formulas can still be used, but now with the inclusion of company-specific information.

Semi-subjective evaluation theory

In addition, another evaluation theory, which the authors call semi-subjective, has recently developed. This approach combines a subjective utility function (investor) with the conditions of an incomplete capital market and thus forms the link between an individualistic and market-oriented approach. The reason for this is the assumption that the concept of utility of all market participants also has an influence within the objectified concept, so that there is also a preference dependency here.

Reasons for valuation

In valuation theory, there is now consensus that company valuations are to be carried out on an ad hoc basis, i. H. When choosing the valuation method, the respective reason for the valuation must be taken into account. While company valuations served almost exclusively to determine purchase or sales prices in the beginning, new reasons for valuation have emerged over the decades. A distinction can be made between transaction-related and non-transaction-related reasons for valuation.

What these occasions have in common is that they all lead to a change in ownership . This means that ownership rights with regard to the stake in the company are transferred from one party to the other. This measure can correspond to the unanimous will of all those involved, but it can also be carried out against the opinion of individuals. A distinction can be made between dominated and non-dominated transactions. In a dominated transaction, ownership and membership rights are changed against the will of one of the parties involved. This would be e.g. This is the case, for example, with expropriation or the exclusion of a partner from a partnership against his will.

Evaluation process

Overview of company valuation procedures - based on Ernst, et al.

Individual assessment procedure

As part of the individual valuation, the assets that constitute the valuation object are valued separately. The aggregate of these individual values ​​forms the gross wealth. After deducting the debts, you get the company value. Individual assessment procedures are:

  • Net asset value method - they determine the value from the existing substance (facilities, buildings, etc.)
  • Liquidation value method - they determine the value from the existing substance (facilities, buildings, etc.), but under the premise that the company will be liquidated immediately

Overall assessment process

If one assumes that the purpose of a company is to make a profit, it becomes clear that the individual assets (and debts) of a company can only be a means to an end, so that from this point of view an individual valuation of the asset components does not appear appropriate. In particular from the point of view of the owners (who invest in a company for the purpose of (future) profit making), a procedure that regards a company as an economic unit for the purpose of making profit seems more adequate. This is achieved by overall assessment procedures. Overall valuation procedures are only to be used under the premise that the company will be continued for an indefinite period after the valuation ( continuation principle ).

Investment theory procedures

In the context of cash value calculations based on investment theory, the company is viewed as an investment object, consequently valuation methods from investment theory are used. The present value of the (potential) investment company is determined as the aggregate of the expected future discounted net returns from the company. The two main procedures are:

  • Earned value method ,
  • Discounted cash flow method.
  • State limit price model (ZGPM) / State limit quota model - Determination of the limit price in the event of a sale or acquisition or the limit quota in the case of a merger or split
  • Approximatively decomposed evaluation - heuristic model for the coordination of the interdependencies between investment / financing planning and the determination of the decision value

Comparison value method

As part of the comparison value method, the total value of companies is also to be determined under the premise of going concern. However, the valuation is made here by comparison with other companies or transactions. The comparison objects should be as similar as possible to the valuation object with regard to the price-forming parameters. The main methods within the comparison value procedure are:

  • Similar Public Company Method (comparable transactions)
  • Recent acquisition method
  • Initial Public Offerings method
  • Multiplier method

Mixing process

In principle, it can be assumed that both the overall assessment and the individual assessment procedure can have errors. By combining the two, both the intrinsic value and the future profitability can be included in the assessment.

Real option approach

Cultural values ​​procedure

With this approach, in addition to the computationally tangible factors such as sales price, profits and material assets, an aspect that has previously been neglected comes to the fore - the culture within a company determined by the employees. A substance value cannot be viewed on its own, but rather has to be brought into the context of existing knowledge, motivation and internal culture. The hitherto unknown cultural values ​​process (“cultural due diligence”) tries to avoid, for example, disregarding the company's hidden construction sites when taking over a company. It examines, among other things, which values ​​should be lived and which should be maintained or to what extent monetary consequences could arise from the emigration of knowledge carriers.

Others

Implementation and service provider

The effort and complexity of company evaluations depend on the evaluation object and the methods used in each case. The assessment of a large company as part of a due diligence review can be lengthy, labor-intensive and highly complex and requires i. d. Usually the use of external know-how. In contrast, the evaluation of a small craft business using the multiplier method is easy to accomplish and can grds. can also be carried out without external know-how.

Various institutions come into question as providers of company valuations :

Depending on the volume of transactions, different advisers or evaluators come into question. In Germany , the middle class is in questions of valuation i. d. Usually accompanied by business and tax consulting companies. In contrast, valuations in the context of large-volume transactions are more likely to be carried out by investment banks.

In the Anglo-American region in particular, it is customary to have the test carried out by a third, independent party. The appropriateness of the exchange ratio determined by them is recorded in a fairness opinion . This consists of a third party expert opinion to make a financially fair assessment.

See also

literature

Remarks

  1. ↑ Walter Brugger : Overview of company valuation methods (PDF; 1.0 MB) at www.profbrugger.at, requested on October 28, 2009.
  2. ^ Werner Gleißner: Basics of risk management in the company . 2nd Edition. Verlag Franz Vahlen, Munich 2011, ISBN 978-3-8006-3767-6 .
  3. ^ Thomas Hering: Financial company valuation . Deutscher Universitäts-Verlag, Wiesbaden 1999, ISBN 978-3-8244-7044-0 .
  4. ↑ Christoph Kuhner, Helmut Maltry: Company Valuation . 2nd Edition. Springer-Verlag, Berlin 2017, ISBN 978-3-540-74304-0 .
  5. ↑ Werner Gleißner: Capital market-oriented company valuation: Findings from empirical capital market research and alternative valuation methods . In: WiSt - economics studies . 2014, p. 151-167 .
  6. ↑ Christian Walkshäusl: Fundamental Risks and Stock Returns: Here too, less risk means better performance . Ed .: Corporate Finance Biz. tape 4 , 2013, ISSN  1437-8981 , p. 119-123 .
  7. ↑ Chu Zhang: On the explanatory power of firm-specific variables in cross-sections of expected returns . In: Journal of Empirical Finance . 2009, p. 306-317 .
  8. ^ Mark M. Carhart: On Persistence in Mutual Fund Performance . In: The Journal of Finance . March 1997, p. 57-82 .
  9. ^ Eugene F. Fama, Kenneth R. French: A five-factor asset pricing model . In: Journal of Financial Economics . 2015, p. 1-22 .
  10. ↑ Werner Gleißner: Risk analysis and replication for company valuation and value-oriented company management . In: WiSt - economics studies . tape 40 , no. 7 , July 2011, ISSN  0340-1650 , p. 345-352 .
  11. ^ Manfred Jürgen Matschke, Gerrit Brösel: Company Valuation . 4th edition. Springer Gabler, Wiesbaden 2013.
  12. ^ Lutz Kruschwitz, Andreas Löffler: Semi-subjective evaluation. August 5, 2003, accessed July 3, 2018 .
  13. ↑ a b Walter Brugger: Overview of company valuation methods (ecolex script) (PDF; 1.0 MB) at www.profbrugger.at, requested on November 11, 2009.
  14. ^ Herbert Haeseler, Franz Hörmann, Franz W. Kros: Basics of the valuation of companies and investments . Ed .: LexisNexis Verlag ARD Orac GmbH & Co. KG. 2nd Edition. Vienna 2007.
  15. ↑ Dietmar Ernst, Sonja Schneider, Bjoern Thielen: Creating and Understanding Company Valuations - A Practical Guide . 3. Edition. Verlag Franz Vahlen GmbH, Munich 2008.
  16. ↑ Gerrit Brösel: Heuristic model for determining decision values . Ed .: Petersen, Zwirner. Bundesanzeiger Verlag, Cologne, pp. 211-228 .
  17. ^ Hans R. Hässig, Roland F. Stoff: Company valuation with cultural values ​​method . Ed .: Corporate Culture Controlling®. 2014.